Jeff Saut, Chief Investment Strategist at Raymond James, is not worried about Friday’s one day reversal or the mounting risks in the market (see David Rosenberg’s 10 reasons why the equity rally is over here). He continues to think investors will buy the dip as portfolio managers chase the rally.
Despite his continued bullish position, Saut is not oblivious to some recently bullish and bearish machinations in the market:
Even though we spent most of last week in Manhattan seeing accounts and speaking to the media, there were some noteworthy market machinations in addition to Friday’s potential one-day downside reversal. First, the recently lagging small/mid-capitalization stocks re-assumed their leadership role. Whether this resurgence is in anticipation of the so-called “January Effect” remains to be seen, but it is a change in the “tone” of the markets. Secondly, the D-J Transportation Index (TRAN/4101.76) broke out to a new reaction high. Third, our proprietary Advance/Decline Index is challenging its October 2009 peak, suggesting the rally is broadening out. Fourth, the NASDAQ Financial 100 Index (IXF/1960.64) continues to underperform and has failed to better its August, September, and October highs. The sage folks at Riverfront Investment Group wrote about this a few weeks in their report titled, “Financials Back to Underweight, Healthcare to Overweight.”
Saut takes a somewhat contrarian view on the approaching 50% retracement level on the S&P. Saut sees the level as a breakout level and a potentially bullish catalyst:
The call for this week: Since November 16th the S&P 500 (SPX/1105.98) has had a difficult time attempting to rally above the 1115 level. Interestingly, that level represents a 50% recovery of the SPX’s price decline from October 2007 (1554) into its March 2009 low (676). It also approximates the downtrend line formed by connecting the S&P’s October 2007 peak with the peak that occurred in May 2008, as can be seen in the following chart. Accordingly, a breakout above this level, with a corresponding increase in Lowry’s Buying Power Index, would be a decided positive. However, as the always insightful Lowry’s organization points out, “From the November 9th advance through (last) Thursday’s close, Buying Power has fallen 4 points while Selling Pressure has declined 37 points.
Interestingly, Saut turns to a point we have been quick to point out. There are simply no great selling catalysts on the horizon, particularly with another earnings season right around the corner. But perhaps most important, Saut sees the end of year performance chasing as the most important catalyst heading into the end of 2010:
Thus, the market appears to be holding near its recent rally highs due to a lack of selling, not improving Demand.” Still, “net long” positions at professional money management firms remain in the 50 – 60% range, which is well below the 70 – 75% level reached at the October 2007 peak. That suggests the upside should continue to be favored into year-end as the under-invested portfolio managers chase stocks driven by performance pressure, bonus pressure, and ultimately job pressure.
Source: Raymond James Financial
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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